Micro-Loans Snake Oil Panacea Or Pathway To New Economic Paradigms

This weblog has skirted around questions about micro-credit, micro-loans and micro-finance in the past. They were either related to other economic issues or links to online programs like Kiva. Recently, a number of articles have passed by my computer screen inspiring me to learn more. Two articles in particular caught my eye.

Microfinance's Success Sets Off a Debate in Mexico - New York Times

They are the center of a fractious debate: how far should microfinance go toward becoming big business? At one end stand traditional microlenders, like the economist Muhammad Yunus, founder of the most famous microlender, the Grameen Bank, and winner of the 2006 Nobel Peace Prize. At the other are the Two Carloses, as they are widely known in this tight-knit world that gave them their start as starry-eyed idealists.

U.S. 'micro-loan' effort yields big results in Iraqi province - Los Angeles Times

Al'laur Abd Mottar, 50, had a dream of starting a business to support his wife and eight children. He would buy and sell scrap iron, a material much in demand as residents seek to rebuild homes and businesses damaged by fighting between U.S. Marines and insurgents.

In November, Mottar got a $3,000 loan from a program underwritten by the U.S. Agency for International Development that is bringing the "micro-loan" concept to war-ravaged Anbar west of Baghdad.

To oversee the micro-loan program, USAID turned to the Louis Berger Group, an international consulting firm based in Morristown, N.J. Supervision of the micro-loans is only a small part of a $154-million contract between USAID and the firm to promote economic growth in all 18 provinces.

Different paths but same destination, either small entities becoming large ones or large entities taking over the territory of small ones. Although the micro-lending industry began in the 1970's, it it is in the last few years that is has been around long enough to have raised some issues and gendered some controversy. Some of these issues have basic economic principals behind them, some are overly optimistic predictions, and some are simply human greed. The following link to the Tyler Cowen's post on this subject provided some rationale economic insight and some history.

Marginal Revolution: My micro-credit essay with Karol Boudreaux

For better or worse, microborrowing often entails a kind of ­bait ­and ­switch. The borrower claims that the money is for a business, but uses it for other purposes. In effect, the cash allows a poor entrepreneur to maintain her business without having to sacrifice the life or education of her child. In that sense, the money is for the business, but most of all it is for the child. Such ­life­saving uses for the funds are obviously desirable, but it is also a sad reality that many microcredit loans help borrowers to survive or tread water more than they help them get ahead. This sounds unglamorous and even disappointing, but the ­alternative—­such as no doctor's visit for a child or no school for a ­year—­is much ­worse.

This 2006 report provides a rosy outlook from a more liberal-progressive perspective.

The Chronicle, 7/20/2006: The Big Promise of Small Loans

Microfinance, pioneered in the early 1970s by nonprofit groups like Grameen Bank, in Bangladesh, and Acción International, in Latin America, is one of the hottest ideas in philanthropy — and it may become the next big thing in the investment world, too.

The overly optimistic and idealistic perspective is not limited to the liberal-progressive outlook. From the other side of the spectrum

The Entrepreneurial Mind: Cynicism about Free Enterprise

It takes time to build wealth. And real wealth comes from free enterprise. Are microloans the answer to transform an economy? Of course not. But they are a critical step in building long term transformations. Microloan programs are not just jobs programs, or worse yet, mechanisms for the redistribution of wealth from one country to another. Instead, they are creating a cultural seedbed for economic freedom and independence.

While I can agree with the good intentions of Professor Cornwall's philosophy, I am also wary of the overly optimistic outlook from the more business oriented perspective. The New Yorker article that Professor Cornwall takes issue with is based on the libertarian Marginal Revolution post above. Professor Cornwall may say cynical but Professor Cowen is likely to say realistic.

So far I have covered economic principles and overly optimistic predictions. The question of human greed will be looked at more closely in a subsequent post.

Best Intentions Unintended Consequences

The Los Angeles Times had an article that called into question whether the Gates Foundation was having a net positive impact on healthcare in Africa.

Unintended victims of Gates Foundation generosity - Los Angeles Times

The Gates Foundation, endowed by the personal fortunes of the Microsoft Corp. chairman, his wife and Berkshire Hathaway Inc. Chairman Warren E. Buffett, has given $650 million to the Global Fund. But the oxygen valve fell outside the priorities of the fund's grants to Lesotho. Every day, nurses say, one or two babies at the hospital die as Mankuebe did -- bypassed in a place where AIDS overshadows other concerns.

Mixed effects

The Gates Foundation has targeted AIDS, TB and malaria because of their devastating health and economic effects in sub-Saharan Africa. But a Times investigation has found that programs the foundation has funded, including those of the Global Fund and the GAVI Alliance, which finances vaccines, have had mixed influences on key measures of societal health:

* By pouring most contributions into the fight against such high-profile killers as AIDS, Gates grantees have increased the demand for specially trained, higher-paid clinicians, diverting staff from basic care. The resulting staff shortages have abandoned many children of AIDS survivors to more common killers: birth sepsis, diarrhea and asphyxia.

The article provided the impetus to go back and look again at the Vivian Hoffman paper. The paper raised questions about the real impact of social-entrepreneurs, such as the Acumen Fund, had on helping the poor. The post links to a Marginal Revolution post and from there to a New York Times article that questioned whether direct distribution of the nets of the nets was best or were social entrepreneurial programs. Similar questions of effectiveness arose from the the Fast Company article regarding Grameen Phone Company.

The Bill & Melinda Gates Foundation supported Global Fund seems to see this either as a public relations problem, if we want to be cynical, or as a problem of self-definition, they can't be all things to all people or perhaps something in the middle. There does seem to be some truth to the later proposition that they can't be all things to all people but it is arguably a matter of balance. Because it's Bill Gates cynicism seems far easier than it might otherwise.

The LA Times did do a follow up report on the Global Funds dispute with their article. The Global Fund not only has their own piece criticizing the LA Times article, they also have a letter from the National Aids Control Commission of Rwanda.

I have an issue with attempts to find fault to create a story, which the LA Times article and the Fast Company article seem to lean too much towards in my view. The New York Times article and Vivian Hoffman paper though seemed different. My second reading of the Hoffman paper did provide a better understanding and impressed upon me again the uncomfortable perspective that going in with a decidedly social-entrepreneurial slant as the best intentions to provide assistance without fully understanding the culture could have unintended but detrimental consequences. What I don't know is what course of action, if any, have been taken by the social-entrepreneurs to address these issues. This is not, of course, the same as arguing that traditional government centered policies are automatically better.

Within the LA Times article they make a statement which is apparently in conflict with what I got from the Hoffman article.

According to UNICEF, malaria kills relatively few children. Birth-related problems, pneumonia and diarrhea are the top causes of child mortality. All are treatable but occur at high rates, in part because resources are concentrated on AIDS, TB and malaria, The Times reported.

This is in contrast to the Vivian Hoffman paper,

Malaria kills over one million people annually, 90 percent of them children under the age of five (World Health Organization, 2004).

What I found at the WHO website, which provided more insight, is that the key health dangers for children are:

• From one month to five years of age, the main causes of death are pneumonia, diarrhoea, malaria, measles and HIV. Malnutrition contributes to more than half of deaths.

• Pneumonia is the prime cause of death in children under five years of age. Nearly three-quarters of all cases occur in just 15 countries. Addressing the major risk factors – including malnutrition and air pollution – is essential to preventing pneumonia, as is vaccination. Antibiotics and oxygen are vital tools for effectively managing the illness.

• Diarrhoeal diseases are a leading cause of sickness and death among children in developing countries. Treatment with Oral Rehydration Salts (ORS) combined with zinc supplements is safe, cost-effective, and saves lives.

• One African child dies every 30 seconds from malaria. Insecticide-treated nets prevent transmission and increase child survival.

• Over 90% of children with HIV are infected through mother-to-child transmission, which can be prevented with antiretrovirals, as well as safer delivery and feeding practices.

• About 20 million children under five worldwide are severely malnourished, which leaves them more vulnerable to illness and early death.

  About two-thirds of child deaths are preventable through practical, low-cost interventions. WHO is improving child health by helping countries to deliver integrated, effective care in a continuum - starting with a healthy pregnancy for the mother, through birth and care up to five years of age. Investing in strong health systems is key to delivering this preventive care.

This does argue for taking a more comprehensive approach to children's healthcare in developing countries but it does not argue that it is being caused by “in part because resources are concentrated on AIDS, TB and malaria, The Times reported.” Amy Smith of MIT, who is recognized for finding low tech solutions for global problems informed us that smoke from indoor cooking was the number one killer of young children.

Meanwhile, Acumen Fund has been recognized by Fast Company as one of its top 45 Social Capitalists: Acumen Fund.

The increasing gap between rich and poor is one of the greatest challenges of our generation. Half the world lives on less than three dollars a day while 250 individuals hold more wealth than the bottom two billion. Creating a sustainable world means reducing that gap.

Aid alone will not end poverty. Traditional charity often meets immediate needs but is not designed to enable people to solve problems over the long term. Poor people seek dignity, not dependence.

Acumen Fund identifies and supports enterprises that provide health, water, housing and energy to the poor. We bring capital, knowledge and talent to accelerate markets for the poor, having seen their power as customers who are willing to pay for affordable, quality services that can change their lives. We have seen this working with our portfolio enterprise in South Asia and Eastern Africa.

While Iqbal Quadir has become the head of the Legatum Center for Development and Entrepreneurship at MIT.

Acumen's founder Jacqueline Novogratz, Iqbal Quadir and others working in this field have also been topics of contemplation in this weblog and have been included within the Pearls of Paradigm Processing Social and Economic Paradigms.

No final conclusion, just an ever increasing realization of the complexity of the issues. As Emily Oster, the University of Chicago economist, pointed out we need to look for root causes in not only understanding poverty and poor health care -- but also other issues such as the price of coffee, and the routes of long-haul truckers.

“In short, there is a lot we don't know; and our assumptions about what we do know may keep us from finding the best way to stop the disease.”

Questioning Assumptions

There is no great desire to get too immersed into what seems to be the tit-for-tat gotchas of Marginal Revolution coments again, because they either offer little real insight into economics just political bickering or are just too much technical minutiae. There are a few posts that get to the heart of what is of interest. One particular example directly questions a previously held premise. Tyler Cowen introduces us to Vivian Hoffman, currently a Ph.d. candidate at Cornell.

Here is the abstract on her main paper

This paper reports results from a field experiment in Uganda. Whether a mosquito net was purchased or received for free affected who within the household used the net. Free nets were more likely to be allocated to those members of the household most vulnerable to malaria, whereas purchased nets tended to be used by the household's main income earners. The effect was strongest for free nets received by the mother, increasing the probability that all children five and younger slept under nets by 26 percent relative to when nets had been purchased by either parent or given to the father.

This makes a seemingly substantial argument against the social entrepreneurship approach as it relates to the distribution of mosquito nets. Of course what it might be indicating is that women, in these situations, should be making the economic decisions and not men regardless of whether it was charity or social entrepreneurship. The social status of mean and women and their interrelationships has shown to be very important in these programs. The Grameen successes were, as I understand it, mostly with women.

Vivian does, however, find the discussion on the Marginal Revolution blog helpful having far greater familiarity with the language of economics.

Thanks everyone for your interest in my work. In my current revision I’m dropping the (tedious and unnecessary) theory section and dealing with the potential sample selection bias arising from the fact that I only observed net use in the households that purchased any nets. The new version should be up tomorrow (what timing!!)

Posted by: Vivian at Oct 16, 2007 7:39:29 PM

Differences that make a difference

My online persona interacts occasionally with various forums. One benefit of this weblog is that it makes it possible to share knowledgeable and expert insights of one realm with another. Even though the realms are often connected far closer than the standard six degrees of separation, the ability to make our own connections creates new paradigms that can be built upon. It is still a learning process but we can take the same beginning, the same path and the same destination again and still discover new perspectives for oneself and others. This post was a nexus between TED and MIT.

The issues raised by the Fast Company article about Grameenphone needs further thought. I have hopeful confidence in the ability of Iqbal Quadir, Grameen and the MIT Program in Developmental Entrepreneurship to address them. Even though we are speaking of an impact with broad reach, the basic economics can provide lessons to those of us working at a more local level. For anybody interested here is the link to an MIT Sloan panel discussion MIT World » : Global Entrepreneurship: Inefficiency as Opportunity ...conducted prior to Iqbal Quadir's TED talk. There is also one sponsored by Technology Review in which he discusses his views on innovation MIT World » : Emerging Technologies: The Innovators' View . Although the challenges with the current credit crunch seem daunting, these videos give one a perspective on how leaders like Iqbal Quadir deal with them.

Robert Frank - The more natural economist

Justin Wolfers on October 3, 2007 had a post in Marginal Revolution in which he introduces Professor Robert Frank and his new book the Economic Naturalist. There are a couple of lessons that I can readily take away from the reviews and interviews. First is Professor Frank's advice to his students that their answers to the questions should be viewed as intelligent hypotheses suitable for further refinement and testing. They are not meant to be the final word. Second is that a good way to learn about a new idea is to write about it. As Professor Frank sees it, "As someone who's written a lot, I can attest to the validity of that. I've never learned as efficiently about something as when I'm trying to write about it." This weblog is based partially on that belief. There are a number of other connection which I look forward to exploring. Some are provided in the link to the Economic Naturalist.

Not being a formal student of economics, it is difficult to determine if Professor Frank's approach puts him in the heterodox category or not. I do see this approach as being more useful to my own concepts of intentional beneficial paradigm shift. The ability to think logically about the effects of actions could have on the future, at least on the local level. My attempts to understand the Grameen Phone issue raised by Fast Company is one example.

Enjoying Economics

I have been following the talk on Naomi Klein's new book "The Shock Doctrine" on Marginal Revolution and the New York Times putting my two cents in. I don't want to read the book and as far as continuing to invest two cents into discussing the book, one should get change back. However, there is another discussion/debate/donnybrook going on between the so-called main stream and the so-called heterodex economists which is much more interesting.

Interesting in that it helps me get a better understanding of the methodologies used by economists. It also directly applies to my ongoing study of understanding how economics would fit in with my idea of intentional beneficial paradigm shifts. The larger debate is still between capitalism and socialism it seems but the world gets more interesting when the capitalist side includes Grameen phones with Iqbar Quadir from MIT and CARE refuses federal funds. I find value in both the thoughts of Professor Cowen and the newly discovered Professor Stiglitz and have not resolved any of my internal conflicts within the logic of my own perspective.

I must admit that I find the theoretical discussions very interesting recognizing that naiveté is one of the best sources of enthusiasm, but it is the more practical and closer to the ground work that I really admire. Its like having a theory of gravity which is interesting to read and think about but it is not that same as using that theory to explore our solar system.

Unplanned Obsolescence

A now not so recent FAST Company article by Richard Shaffer Unplanned Obsolescence
takes a seemingly critical look at the Grameen Phone Company.

"Grameen's famous Village Phone Program lifted thousands out of poverty-- and helped Muhammad Yunus win the Nobel Peace Prize. The problem: It's not working anymore."

However it never mentions Iqar Quadir who also played an important part in the Grameenphone program. The article cites a number of benefits from the program before getting to it's main complaint which is that it did not maintain those benefits forever. This raises a couple of questions. One, should we be surprised that the benefit decreased over time or is this another example of another economic factor becoming a commodity. Dictionary.com defines Commodity as 1.an article of trade or commerce, esp. a product as distinguished from a service. If everybody has the article of trade then the service is no longer as valuable. Obviously those individuals who entered early and capitalized on their early fortune will do better than those who didn't. Bringing up the second question, individual entrepreneurs often go through what is deemed the "Valley of Death" basically the transition from working in the garage to having a viable sustainable business. (Can't seem to find my copy of the graph right now) Do developing countries go through that as well? A few people will benefit from early intervention but it does not mean that the stimulus will be there to move the country to the next level. This would mean that we need to be circumspect about early successes while nevertheless still pushing forward, being able to answer such criticisms not only with words but new ideas and actions.

Online Persona

An effect of this web experiment is that I now have an online persona. I have had online identities before so that the e-mail can get to the right place but not a persona. Of course its a fledging one but definitely has some advantages over my real world one. Best one is that I can always go back and correct errors that I usually can't in the 'real' world. Also my many quibbles and foibles are left behind or are at least not as apparent. Still there are many mistakes to be made in the online world as well. My online persona gives me - courage seems too strong a word - but making a first comment on other blogs seems easier than before. I had already started commenting on TED. Yesterday I saw a post from Marginal Revolution's Tyler Cowen, Every claim is wrong. Though likely more "liberal" than most of Professor Cowen's readers, his post raised some interesting questions which I have to take some time to ponder.

There have been other posts on the web also requiring greater thought dealing with the Grameen Phone Company who's founder Iqbal Quadir is featured under Social and Economic Paradigms . The article raising the questions is from Fast Company - Unplanned Obsolescence.